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Derek Lowe's commentary on drug discovery and the pharma industry. An editorially independent blog from the publishers of Science Translational Medicine. All content is Derek’s own, and he does not in any way speak for his employer.

Drug Development

Drug Development Costs Revisited

A recent paper on drug development costs did not impress me. But if possible, it impressed Matthew Herper at Forbes even less. That’s the one where the authors looked at a number of companies that had been around long enough to develop one drug – they figured that this would give a cleaner read on what that one drug cost, as opposed to trying to work it out from a larger or more well-established company’s budget, and the figure that they came up with was $648 million.

Herper takes issue with this in the same way that I did:

Prasad and Mailankody assert this analysis takes into account the high attrition rates of drug development because each company was developing between 2 and 11 experimental medicines, only one of which reached the market. But this assumes that the companies were developing a large enough number of medicines to capture the high failure rate of drug development. Given that 9 in 10 medicines fail, it seems unlikely that looking at companies that had made 4.3 attempts at creating a drug, on average, would capture this. Conceptually, this is no different from simply looking at companies that had only tried to develop a single drug and happened to succeed. Researchers call this “survivorship bias” – it’s like estimating an average lifespan by asking people their ages, but not finding out if anyone already died.

He has the data to back this up, too. If it really costs about $648 million to develop a drug, then you would figure that as a company gets large enough to have several projects running, those costs should converge more and more on a figure in that range, as you average out the slightly-cheaper and slightly-more-expensive ones. Heck, it should probably converge on something even lower, because a larger company would certainly have some economies of scale in its development costs that a smaller one-drug company has had to pay full whack for.

But that’s absolutely not what happens. As Herper shows, the more drugs a company has developed, the higher the average cost per drug. That, my friends, is because the cost for the one-drug-only companies is not representative, for just the reasons mentioned above. When you look at what companies spend to keep on developing drugs, year after year, the true costs become apparent, and the number is not pretty. It comes out to a bit over $2 billion per, these days.

And “these days” is an important qualifier, because these costs have not been static. One of the things you come away with from studying this issue is that the cost-per-drug has truly been increasing, and that the (relatively steady) productivity of the drug industry as a whole is due to lots more cash being frantically bulldozed into the furnaces behind the scenes.

The real problem is that the amount spent to develop every new drug seems to be increasing. Prasad and Mailankody present the $2.7 billion Tufts estimate as being in contrast with an estimate of $320 million produced by the group Public Citizen. But the Public Citizen estimate, which is also based on R&D budgets divided by the number of drugs approved, is based on drugs approved in the 1990s. And the most obvious explanation for the difference is that the R&D dollars spent per drug have increased ten-fold in two decades. This is exactly the observation that Jack Scannell and his co-authors noted in Nature Reviews Drug Discovery in 2012, calling it “Eroom’s Law” – the reverse of the tech industry’s Moore’s Law, which predicts that transistors become exponentially cheaper over time.

Exactly. I would like to lay down a challenge for future authors who want to show that “come on, drug development’s really not all that expensive, right guys?” Unless they can show that they have read, understood, and refuted the best writing and evidence on this subject, with detailed reasons why the previous analyses are wrong, they are not to be taken seriously. Everyone who comes after this topic mentions the Tufts figures (which are damned close to what Herper arrives at, by the way), but generally to brush them off with a “ah, that can’t be right” and an insinuation that they must be a bunch of industry shills. But that won’t cut it. If you want to show that drugs are actually a lot cheaper to find, then you not only need to engage with the Tufts numbers, in detail, but you need to also deal with the writings of Jack Scannell, Bernard Munos, and others, with those others very much including Matt Herper. Show just why they’re wrong. Don’t just wave your hands at them in annoyance and say that these numbers are obviously inflated or something – show why they’re wrong. Because I don’t think that they are.

53 comments on “Drug Development Costs Revisited”

I’ve been intrigued by Eroom’s law from the very first time I heard about it. It leads me to question: what is the maximum amount of money society is willing to spend on developing a new drug? When will we reach this? What will happen when we do?

How much society is willing to spend to develop a drug depends very much on who’s afflicted. We spent $billions to treat HIV–and invented a lot of anti-viral science along the way–but haven’t yet taken e.g. tuberculosis as seriously. Those patients are rarely able to pay the cost of such an new drug.

This number has already been reach for some drugs in some societies. See the link to an article on Orkambi in England. The article is a year old, so perhaps someone else knows what the current situation is.

One of the key questions is that drug development costs are 10x higher now than in the 1990s but are we getting our money’s worth? I.e. are we getting better more effective and/or safer drugs? In the case of biologics I would say that the answer is yes. In the case of small molecules the answer is no. Sure there are areas here and there where there has been measurable safety improvements (nothing seems to have improved efficacy), but overall most of the changes haven’t resulted in improved products. And one of the things invisible to the general public is the lost opportunities – the investigative drugs dropped early or ideas never pursued because of cost.

@Janex, I think this is the key question. At what point does drug discovery become so expensive it’s simply not worth it? I think there are a couple of ways to begin this analysis. First, what percentage of total healthcare spending is on prescription drugs? That number has been pretty steady at 10-12% of total healthcare spending. To me, this is a pretty small number. So as of now, whatever it may cost to develop drugs, it’s not costing society all that much to have use of those drugs. Second, ‘what has the drug industry done for me lately?’ I.e. are we actually seeing good results of all of this effort? I think of Keytruda, Sovaldi (et al.), Gardasil-9, the myriad RA drugs. These are game-changers. Five years ago they didn’t exist. I think these are real advances. Third, what is in the pipeline? I have a very clear window into immuno-oncology, and what I see is truly encouraging. There’s a lot of good stuff coming. It would be a shame to cut it off now. Fourth, have we solved all of the medical problems we can realistically hope to solve with pharmaceutical intervention? No, I don’t think so. Infectious disease, metastatic cancer, Alzheimer’s, to name a few. These are difficult challenges, but they’re on the radar. Fifth, is there another group besides pharmaceutical researchers that can execute on this work in the absence of a healthy pharmaceutical industry? Not that I can see. But I’m sure some will disagree.

My dad was recently diagnosed with prostate cancer and just underwent triple bypass surgery (he’s 68). This in spite of the fact that he lives as clean a life as you can imagine, exercises every day, and has weighed 155 lbs for the past 50 years. This is my fate too if we don’t find new interventions to prevent and/or cure these diseases. I’m glad PCSK9 inhibitors exist because it’s another option for me if statins don’t do the trick. Right now there’s little that can be done to manage metastatic prostate cancer, but that could quickly change. It’s on the radar and even I have some ideas I want to pursue. When the ideas have been exhausted and the industry clearly isn’t making progress, that’s when it’s time to step back. There’s so much promise right now.

Steady unsustainable growth in both healthcare and in Pharma R&D, so which one blows up first? Could be that the larger one, health care falls apart first, perhaps country by country, and takes the Pharma industry with it.

It’s not that we need to stop drug development if we’re not getting value for the money, it’s that we need to stop all of the additional things (extra clinical trials etc) that aren’t adding value. If drug development in the 1990s produces the same quality of drugs as drug development in the 2010s at 10% the cost, then we don’t necessarily need all of those expensive tests we thought we needed and a lot of that extra cost is driven by requests from regulators. (Does not apply to biologics, for which there are profound safety/efficacy differences between the 1990s and 2010s).

And re the question of when does drug development become not worth the cost. I don’t know where the inflection point is – but that will be when cancer drug development starts to look like tropical disease drug development.

Hm, can you tell me where to invest before the company runs an extra Phase 3?

It fundamentally does get more expensive to run trials when there is a robust standard of care with existing drugs, doesn’t it though?tang Unless you have a breakthrough, your benefit-minus-harm improvement is a small signal, compared to the easy trials the “first for indications” were able to run. And you do have to show value worth paying for over existing drugs.

(This mechanism seems like somebody would have quantified its effect by now, comparing development costs where there is or isn’t an existing drug for the indication. Did somebody already show empirically my expectation is wrong here?)

First of all, Gilead didn’t do it, Pharmasset did most of the hard work. And second, Sovaldi cost < $250 million to develop.They mau have paid $11bn for Pharmasset, but the goodwill for Sovaldi was only valued at about $74m

A key point: The number you get looking for where the R&D/drug figure converges is $5 billion. You get down to $2 billion when you knock out all the really big companies, but leave those who have multiple approvals. I’m not sure this technique can give you a figure that is really comparable to the Tufts estimate. But it is hard to imagine what all these R&D costs are that bring it down to the $500 million range given the real dollars being spent. A lot of the things I hear people complaining about — executive pay, me-too drugs, etc.– could only be counted in R&D! A figure of $2 billion is what you get when you try to account for big companies being wasteful!

One thing that could bring the figures down are taxes, and I’d love to see a good analysis of that. It’s also clear that ultra-orphan drugs are much less risky (and therefore cheaper) to develop. And, honestly, there is no reason any company should be up at $10 billion per NME, except that sometimes it’s worth spending a lot on one product. Merck is rightly plowing a ton of its R&D into Keytruda.

Good article, showing some clear thinking. A point I’ve made here before, and will continue on: Investment in secondary indications can be huge, and hugely valuable, but is lost in this type of analysis. You mention it, but then you go on to mention that Abbott “had a bad decade” from 2003-2013, with 1 NCE for ~$13B. If you look at all the indications they added for Humira over that period, and how the sales grew, you might reach a different opinion.

I think the only cost effective way of discovering a “new” drug is to take two old drugs and formulate them into one pill and call it a “new” drug figuring that MD’s won’t know the difference. Sad thing is that strategy actually seems to work…….pretty well. They really don’t know the difference. I’m going to go out on a limb and estimate that those “new” drugs are cheaper to develop.

I refer to that as the boilermaker approach to drug “discovery”. If I was an entrepreneur, I’d formulate a beta-blocker, an ACE inhibitor and a diuretic into one pill, do a trial, and market it as Crapapill.

I think you were being cynical, but what is the status of NitroMed’s BiDil (a mixture of hydralazine and isosorbide dinitrate)? The arithmetic is something like a penny of hydralazine plus a penny of isosorbide dinitrate adds up to $5-10 pill.

Those groups are likely either targeting old drugs with significant previous data on toxicity, bioavailability, etc. (non-profits) or planning to sell to larger pharma or other entities to handle the development of the drugs (small pharma, sometimes non-profits) and so unlikely to spend that money on what they don’t have to. If they had to get that data, their costs would likely be higher.

This also assumes that they are actually aiming to get a drug to market; at least some small pharmas are simply looking to get paid for their candidates and get out; while they aren’t spending as much on their candidates, it’s only because they’ve offloaded (or are hoping to offload) those costs onto someone else, and if the drug is to become one, those costs will have to be paid. Risk-sharing deals may help (how desperate the buyers are will determine how much risk they have to accept) but someone is going to spend that money.

The discovery of a new functional molecule showing some in vitro success is hard and expensive, but not compared to the rest of the process.

It’s pushing this molecule through all the models and phase I – III trials that eats up all the $$$. I think there are very few (if any) startups or non-profits that went all the way from new molecule / AB to finishing the phase III trials successfully.

Overall, I think that limited funding and time pressures really do focus smaller companies’ efforts, although (taken too far) it can lead to some pretty egregious corner-cutting. As for self-funding, that’s tricky: you need plenty of capital and expertise to make a go of it in this game. The closest examples are folks who contract everything out, and that needs very careful management, as you’d imagine:

As for nonprofits, there aren’t many good examples. I’ve had my problems with some of the claims in this area in the past. Many nonprofits now seem to be finding existing biopharma companies to link up with, from what I can see.

So this is public in that it has been discussed quite openly. The not-for-profit area as a nice example of what it can cost. Wellcome Trust used to run a funding scheme called Seeding Drug Discovery (Wellcome was quite hands on so it wasn’t a throw money at it approach) that funded academics, biotechs and pharmas on specific projects (anything with an unmet medical need so quite broad), approximately from hit to phase 1. They did it for 10 years, it cost @400m GBP (direct costs, no overheads), @50 projects were funded and one product has got through to market (Achaogen, Plazomicin). So the discovery costs alone to get one product to market are already about $530M. Even if you take in biotechs, pharma and academics, you still get a pretty substantial sum of money just to fund the discovery work alone(!) to get one product to market. It was all small molecule and across many therapeutic areas and business types. I think it’s a reasonable example of what a portfolio actually costs. Again, discovery costs only; Wellcome rarely funded much in Phase 2 and almost never into Phase 3. So I completely agree that the actual data out there points to a much bigger number to get a product to market.

I’m also very familiar with the Wellcome Trust’s Seeding Drug Discovery program. Because the timelines are so long, I would be careful about claiming that there was only one drug that has made it to market. (There is only one so far…) They were also willing to fund more high risk projects.

Absolutely Troy. 400M gets you one drug and maybe more. I certinaly hope that a few more make it. My point was that even to get to one it takes a decade and way more cash than the nonsense numbers suggest. And certinaly the Wellcome portfolio is high risk, but that’s all part of the fun.

A big sign that someone is in the wrong is when they refuse to answer other’s concerns with anything other than, “. . . well, that can’t be right.” Explain why it can’t be right, it’s the old writing adage: show, don’t tell.

An additional confounding factor that makes big pharma R&D costs proportionally larger than small companies might be that big pharma tackles a fundamentally different set of drugs and diseases. Because of their expanded resources, big pharma has the stability to go after more complex disease states that may take years to figure out. Smaller companies are trying to get the lowest-hanging approval they can. I’d be interested to see if there has been research to evaluate which types of drugs get pursued by big vs. small pharma.

One would also think that big pharma is willing to take on more medicines that require extensive post-approval studies, as well as medicines that need dozens of trials to evaluate their efficacy in combination therapies. Would this also contribute a larger R&D number per approval?

That’s a very good point. You’re going to need deep pockets and lots of expertise to go after some of the mechanisms out there (like Abbvie’s BCl-Abl stuff, or tacking transcription factors). If there’s some new enabling technology that breaks a field open, a small company can jump and take fast advantage of it, but some of these things need contributions from a really broad (and expensive) range of people to have a chance.

Is the first part true? I mean could you point to the numbers showing ratio of in-house-from-scratch-developed vs acquired drugs in Big Pharma (also a rate of market success for both categories would be interesting to see)? I feel like nowadays news about hot startups blazing new trails in Alzheimer/Parkinson/Immunooncology etc. are proliferating faster than E.coli. Sure, much of that is due to ‘publication bias’ so some solid numbers would be indeed interesting to look at.

Also unrelated, while it’s widely admitted that clinical trials disproportionally add to R&D costs, is there any studies/estimates on trade-offs of cutting late-stage vs early-stage development? E.g. would Eli Lilly be better off not pushing solanezumab into another trial and investing in early development of other mechanisms? Hindsight aside, I mean.

So where is all that money going? You’d think with all those huge expenditures, they could have kept a few older medicinal chemists and natural products guys around just to keep pinging away the old fashioned way, except using a few of the newer tools. How much of this money is going to guys like those Flexus (or Sirtris) dudes who probably never touched a chemical, cell or animal in a research way?

There’s some of that , to be sure, but much of the money goes into clinical development and CMC. Everyone knows clinical development is expensive, but few people understand how enormously expensive the CMC work is.

There needs to be some regulatory relief in these two areas. Of course, standards need to be rigorous (duh), but assuming that every single regulation promulgated by the FDA is absolutely essential is as silly as assuming the industry can regulate itself. The Agency needs to take a risk-based approach to the crafting of new regulations so that the end result is that we are actually protecting the public health, rather than trying to create a risk-free environment.

I have the same question: where is all of this R&D money going? I don’t recall ever seeing an analysis that breaks down the flow of money. I assume the escalating cost is NOT internal FTE costs (of chemists, biologists, clinical, reg, etc). Is it tied to the volume of studies increasing or the durations and pateint numbers of needed for current studies Or is it tied to payments for professional services by investigators, hospitals, labs, etc.

Can anyone point to a decent analysis of where all this money is landing. someone must be getting rich from these escalating costs?

At least where I work, a lot of it seems to be blown on expensive, unproven new technologies that some senior manager has been convinced is the next great thing that will solve our productivity problem. Combichem, genetics, and now big data and AI… We never seem to learn.

Big companies have negative economies of scale:
1)They have more layers of management, which slows decision making (time = money).
2)They have higher employee costs (salary and benefits) because they can’t offer the promise of explosive stock growth
3)They generate lots of useless data that doesn’t drive decision making just to CYA.
3)They take on more non-critical path activities: Lobbying, etc.

They may have some advantages in terms of capital, and larger discounts with vendors, but it’s not obvious which way all these factors balance out.

Norm Augustine was Under Secretary of the Army in the mid-1970s and later ran Lockheed-Martin (F-16, F-22, etc) for many years. Years of observing Department of Defense acquisitions led him to publish “Augustine’s Rules” including such items as Rule 16 which grew out of his observation that while budgets increase in a linear fashion, the cost of new military aircraft tends to increase exponentially. He would tell people that by 2054, the entire Defense budget will purchase only one tactical military aircraft and the Air Force and Navy each would get the plane for 3 and one-half days per week except for Leap Years when the Marines would get the plane for a day.

This is a good discussion, but there are a few points I haven’t seen addressed here. One is acquisition costs. If Big Pharma pays $3B to buy a drug that a small biotech has only spent $200M developing, that’s a big chunk of change suddenly added to the development cost. Second, looking at most company’s numbers provides only a snapshot in time. If company A has developed one drug and spent $1B on it, but has two other molecules in phase II and two in phase III (at a cost of another $1B), then they’ve spent $2B to get only 1 drug. If Big Pharma buys the rights to both of the phase III drugs several months later for $2B each, then that company will have spent the same $2B but now have recouped a huge return on that R&D investment. Since they didn’t get the drugs over the finish line, they can’t count them as drugs developed. These types of scenarios really make these calculations quite difficult. There should almost always be a pipeline that must be factored in, as well as purchase/acquisition/milestone costs.

I thought some of that was part of what drove the prices of HepC drugs – when Gilead bought Pharmasset, the money they paid to buy them had to made back quickly before other drugs entered the market. That led them to set a significantly higher (list) price for the drug than it would have had under Pharmasset, and others used their price as a benchmark.

On the other hand, at least some of the money gets invested in companies because they may either make something useful or get bought out to get something useful, and if buying them out weren’t possible, some of the companies (and their drugs) wouldn’t have existed. Doesn’t help the employees, though.

I have no insight of how much it costs to get to an approved drug as I’ve not been fortunate enough to be involved in such a project.
Like most people in drug discovery, I do pay attention to physicochemical guidelines like Lipinski’s rules. But where did they come from? Lipinski analyzed Phase II candidates but there were no rules. He only got there by taking out peptide and nucleotide compounds. Well, the set of approved drugs is much smaller than Lipinski’s data set. It’s filled with outliers. Keep them all in and you’ll get an average that’s not applicable to every project. Prune the set and you can bias it towards a lower or higher number as you wish. However you debate it, there’s no doubt drug discovery is expensive.

I agree with the threshold revenue size needed to continue growth at these massive companies. Additionally, the market now rewards only differentiated drugs (which is good). This increases the likelihood that large companies will swing for the fences vs the smaller firms that are happy with a double. Countering that attitude, big firms have lots of incentive to take the fastest cheapest route to get there which should hold down costs a bit. Smaller firms are paradoxically less efficient and often have to circle back to repeat things due to shortcuts.

A number of the comments touch on but don’t quite hit the nail on the head with regard to the major problem – the gargantuan size of today’s pharmaceutical companies that have grown by accretion. That means that a successful drug has to be a multi-billion dollar drug, so the costs are commensurately higher. It used to be that companies were successful if they created a drug that brought in $50- or $100MM in revenue. But as they grew those drugs got tossed out the window because they won’t affect the company’s stock price, which is all that is driving the business guys. So the definition of a successful drug has increased to where it now needs to be substantially in excess of $1B and the entire enterprise has gotten much more expensive. I still don’t believe the $2B/drug number (being in small biotech I know we can do it a heck of a lot cheaper than that) but I do believe that scale is adversely affecting the cost of doing business.

the reason why drug development at big pharma is getting insanely expensive has to do with inability of mid-level management to make decisions – for example about external academic collaboration or the directions of their project on their own, and they are even awarded to take alibi approach (you can never be proven wrong if you kill a project). The top management in turn is richly compensated for lying to investors and setting unrealistic expectations which clash with the reality, and it is too bad for the reality. (“we can save two billion on merger synergies. We can bring four new clinical candidates every year. We will be working only on blockbuster drugs – any drug with a projected sale bellow a billion a year is not worth our research effort”) This results in lemming trends, very costly acquisitions of fashionable technologies and so on. The biggest problem is that the drug research development cycle takes longer than the average lifespan of a CEO, so it is very tempting to cut cost by “streamlining the research” and you don’t even have to come up with new catchphrases, there is always enough consultants selling the newest paradigm shift, six sigma, black belt, fail early, open office, silo-based, flat structure reorganization scheme which coincidentally centralizes power in the hands of the new CEO and side-rails his opponents. When he retires six years later with a 200million golden shute and the post merger company has half two thirds of the sales, and quarter of research staff of the two companies pre-merger, and the morale is decimated by several rounds of reorganizations and layoffs, the cost have to go up.

I worked for Pfizer, in the McKinnell era. It was one of the most dysfunctional organization that I have ever seen – they were not even evil.

I worked for PFE in the Steere days (pretty good place to work) and then into the McKinnell years too (holy mother of c***** in a chicken basket). While the years leading up to the McKinnell era were certainly more enjoyable, both eras were unbelievably wasteful and dysfunctional. I moved on more than a decade ago, and while I certainly can’t say what it’s like to work at PFE these days, I can say with certainty that in contrast to my days at PFE, these days I’m quite proud of my upper management, the decisions they’ve made, and the direction the company is heading in. Working at [a different big pharma company], I actually feel quite motivated and empowered to do the best science and tackle the most important problems. I’d be careful painting too broadly with the ‘because-look-at-PFE’ brush.

What are the real costs for all of the Big Pharma downsizing events and biotech bankruptcies ? We talk about the high failure rate of therapeutics, but that’s product and patient specific.
Thousands and thousands of highly skilled employees / families are negatively impacted by those failures. Missing the endpoints often means the end of jobs, companies and portfolios.
Those are immense human costs that are absorbed into the overall price of developing new medicines. Here’s the ADME costs for pharma failures.
Absorption: Recruiting costs, relocation fees, signing bonuses ( haha)
Distribution: new employee training, departmental deployment + lotsa meetings
Metabolism: Full assimilation into The Way
Excretion: drug fails, here’s your crappy no-severance package

Hi All, very interesting discussion. I applaud the authors for disabusing those who believe that the Tufts numbers are grossly inflated. This is a complex problem. One aspect that has not been addressed IMHO is that small companies often must approach portfolio decision-making differently than do large companies. If you are Roche/Pfizer/Merck you can afford to kill a drug that doesn’t have supporting data . . . small biotechs who are starving for funds often must use accept a different uncertainty profile for a program. If they kill their one drug there goes market cap or funding. The bottom line is that even with the best of intentions and with good data not all decisions are science-based.

Actually, I would say it differently than Sam. In big pharma you’re rewarded for killing a project even if it might be promising. Again, because of the gargantuan size of large pharma, it doesn’t really matter if a drug is good if the marketing guys don’t think it has the potential of being <$1B/yr in revenue. Of course, since the marketing models are all BS (McKinsey showed that big pharma can't even project sales accurately 6 years AFTER launch) lots of stuff that might be good are never developed. Small biotech, however, will pursue drugs even if they have a much smaller market. The prime example of this is Amgen, which was told in the early days that Epo would never be a big seller because there aren't that many patients with kidney disease. It became a multibillion dollar drug despite what the marketing guys said (though later it was shown not to be all that safe).

I mean, a 1990 dollar does not have the same value as a 2016 dollar. What cost $500 million in 1990 would cost almost a billion in 2016 ($982mil if you want to be picky). So a doubling of development costs between 1990 and 2016 is strictly due to inflation.

While I’m glad to know that the authors remembered to convert to constant dollars, that’s a downright terrifying issue for the Pharma industry.

Then again, there’s an old saying among car guys about how the last 10% of the work to get a project from ‘close enough’ to ‘perfect’ takes about 90% of the man-hours. So, is it possible that we/the Pharma industry is currently in that last step to get from ‘close enough’ to ‘perfect’?

My apologies if this is mentioned already, but small companies typically focus on one type of modality (e.g. siRNA) and a small number of disease areas. Big pharma, on the other hand, may develop many different modalities for many indications. In this type of scenario, economies of scale are not fully realized.